Stop Predicting The Future, You’re Terrible At It!

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We humans are really good at convincing ourselves of our “upper hand” — that we can see the “truth” when others cannot. We repeat stories of winning hands, the right stocks, and big paydays with our closest friends. Examples and supposed successes of prediction are trumpeted in our skewed media landscape, too.

For instance, CNBC and other financial news networks feature stock chartists who create lavish drawings of candlesticks, moving averages, and support levels. Lines are drawn and circles made on fancy touchscreens. When a stock fails to perform as predicted, it’s written off as a statistical anomaly. And nobody returns to the err. The reality is that any stock-picking strategy is fallible because the herd knows about it (or soon will). These technical mavens’ moves are already priced into stocks.

Scientists can also be poor predictors of future technology and advancement. As an astrophysicist, Neil deGrasse Tyson, explains, “…what happens is, if you try to go too far into the future, there is no way you are going to predict the cross-pollination of ideas and fields that produce things that are not extrapolations of anything going on at that time.” He exemplifies this technological development with the iPhone, as it wouldn’t have been created without GPS satellites, cell towers, and the commercialization of space. Variables needed to coalesce and come together to make the idea possible. Predicting each of these individual components is nearly impossible.

Variability shifts from 0 to ∞ across time. From short to long-term periods, our ability to predict what’ll happen next suffers. Also, what do you think of my chart-drawing skills? 😉

Psychologists are another fallible group that’s highlighted for near-telepathic powers. Popular culture seems to hold high esteem for their predictive abilities. They are depicted as readers and savants of the mind. Watch what you’re thinking, they might just read your body language, thoughts, and emotions! The reality is that psychologists aren’t fantastic at predicting behavior; slightly better than the lay public, but that’s not saying much. At their best, psychologists center on past behaviors as predictors of future behavior. Much like the stock chartist or scientist, psychological/behavioral prediction is sort of like analyzing an historical stock market chart and looking for patterns.

In failing to see our losses and failures of prediction, we risk creating confirmation biases. These psychological tricks of the mind make us think we are right — that our hypotheses have time and time again come true. We repress our failures in favor of successes, but in doing so, jeopardize our ability to accurately plan for the future. That’s when we stand to lose boatloads of money.

The fact is, we are fallible creatures. Seemingly, we are basically limited by the amount of knowledge available on the world. At a long enough timeline, nearly everyone fails.

By accounting for predictive limits, we can protect and preserve our wallets. Now, it’s all about what we do with this realization. These are five fast rules for managing your money without genius predictions:

1. Budget based on present day information

The present day includes your current income and expenditures. If you’re budgeting for a car, Christmas presents, or anything else, your budget should account for today’s income — not chances for the future. This will always keep you within limits. Unfortunately, many people use pay raises and predicted promotions to account for future purchases. This mentality can lead to excess debt and complicated repayment plans. Avoid the drama by budgeting based on today’s information — not what tomorrow might be like.

2. Be careful with retirement predictions

Companies like Betterment and Wealthfront have some sexy chartists! They beautifully illustrate the capability of compounding interest and continued investments in average performing stock markets. However, this tends to smooth over the swings of market swings and does not account for the unexpected. In fact, Betterment has a tool that attempts to predict with 50/50 accuracy how your money will perform over a set period, but it’s better to make consistent investments and look at the principal — not the predicted total.

3. Build up emergency funds

From a car accident to strange toenail fungus, you never know when you’ll need to pay for some extra costs. We cannot predict when an accident or the end of a job could occur. To account for our predictive inability, let’s build emergency funds. Most financial experts suggest people maintain about 3 months of solid income, which would cover expenses while you search for a new job or deal with an accident.

4. Avoid following interest rates

Tens of “online banks” are propping up with teaser interest rates. Instead of chasing the next biggest thing, stick with the consistent. For example, Ally Bank has earned my trust and respect after years of solid performance and service. This online bank doesn’t have wacky fees, gives me free checks, and pays a solid interest rate in both checking and savings. When you find a solid, long-term rate, stick with the bank. It pays to find a good company and then worry about making more income elsewhere — not following the next greatest interest rate.

5. Invest regularly – don’t chase bottoms

This tip comes from one of my hardest investing lessons. When it comes to putting money in the stock market, don’t call bottoms. Humans inability to predict is never worse than right here. If you think the market has crashed, you’ll likely be proven wrong. The stock market has tons of false bottoms and tops. Prediction isn’t generally your friend. Instead, I use average investment amounts and make regular investments. When the market suffers, I tend to invest more. But avoid the chase and focus on making consistent investments.

Comments

Sam, these five fast rules I truly favor. They all encompass consistency, when it is entirely true we cannot foresee what unpredictable events may lie ahead in the future. Avoid following interest rates is a great one! This almost reminds me of the people who sign up for Comcast, then cancel after their promotional period and join with DirecTV (and continue the cycle). The hassle & switch seems to add up more fees/costs than what you could have saved with just staying the current service that does not give any hassles.

Great suggestions! I think the first tip—budget based on present day information—is so critical. Yes, there is always the chance we may get the raise, bonus, or promotion…but there is also a chance we may be laid off or decide to change to a lower paying job that would be more fulfilling. Also, keeping expenses in line with current income helps us prevent lifestyle creep. If that extra money does come our way, we can save it instead of spend it, and become closer to financial independence.

Great advice, especially when it comes to emergency funds. We can’t predict when or what will happen in the future, but we can be sure that Something will happen at some point. We need to be prepared as much as we can!

I’m just 7 work days from turning in my early retirement notice and watching with some concern the volatility in the market. We have a big cash reserve (3 years spending) so that makes me feel good that even if I can’t predict the future – I can plan for contingencies. Good post!

We were just having this conversation last night! There are too many variables to know how the future might unfold, so we’ll continue with our standard 401k investments and our regular ole checking accounts–less of a headache when we don’t have to lots of accounts.

So hard to predict the future, especially with the stock market. I usually make assumptions regarding my retirement “number” and work backwards to determine my savings rate. At the end of the day you have to check in periodically because many of your original assumptions need to be updated. Especially your assumed rate of return.

Trying to predict the future is such a losing game – get it right and it’s basically luck, not repeatable, and you trick yourself into thinking you’re good at it. Sadly, what’s good for you is boring and doesn’t sell clicks. Save early, save often, prudent asset allocation, you won’t believe what happens next!!!!, repeat… but who wants to read that article? 🙂